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The Italian Referendum

The large majority of the NO points towards early elections, before the “normal” date of Q2-2018; priority will be to rewrite the political law, to vote the 2017 budget and to continue on banks recapitalization. An interim government would probably come just in the few days after Renzi’s resignation.

A period of political uncertainty is coming back on Italy, with rising difficulties to form a government coalition or to find a clear majority. No time for the government to engage new economic reforms in front of political uncertainties.

The ECB is prepared to give liquidities if necessary and should pay attention to avoid any fragmentation or contagion effects on bond markets, using its QE or TLTRO measures. Liquidity could prevent from any systemic risk, but politics will interfere with scheduled recapitalization process of banks.

Italian growth recovery looks already fragile and its performance will probably continue to lag the eurozone.

The outlook remains limited and GDP growth should stay below 1% in 2017, as consumption stays moderate. Despite reforms in labor, unemployment rate is still high (11%) and wage growth flat.

The outlook on investment is limited and further support was expected (lower tax, incentives to innovate) from the former Renzi’s government. The political situation creates downside risks on activity in the coming quarters.

Fiscal balance has improved, and deficit is expected to stabilize around 2.5% of GDP in 2017, and public debt at 133%. A primary budget surplus exists (around 1.5% of GDP), but it looks too small to stop public debt to continue to rise.

As growth remains stuck below 1%, a strong rise in long-term interest rates will deteriorate further public financial situation and increase mechanically public debt.

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